An Overview of Foreign Direct Investments

We all are aware how indispensable Foreign Direct Investments (FDI) are to boost economic growth on a large scale. Moreover, the foreign capital flowing into any country is also one of the powerful sources for economic development of India as this money is used to establish tangible assets in company. Meaning of FDI: Foreign direct investment is a broad term where an investor from a different country invests money in a business of another country to take economic advantage of expansion, wages, cheap skill set etc. This can be done either by setting up a business with an infrastructure for operations or by the way of purchasing business assets in other countries by the Multinational Corporations (MNCs). FDI example: SAIC Motor Corporation is planning to enter India’s automobile market and begin operations in 2019 by setting up a fully-owned car manufacturing facility in India. Types of Foreign Direct investments: Horizontal FDI is where entities carrying on similar activities combine. Vertical FDI is where companies performing different types and stages of manufacturing combine to produce the final product. Conglomerate FDI is the most different one where investments are made in unrelated business, it is challenging as it involves working in a new industry and fresh markets. What are the advantages of FDI? There are a plethora of advantages that a growing economy like India can derive from FDIs. Few of the predominant benefits of FDI are listed here. Source of capital: They act as a source of external capital to the Indian companies, especially growing startups which in turn is beneficial in deriving more revenue. Employment opportunities: Once the infrastructure is set up, the business requires local labour, equipment etc leading to the creation of new jobs. Tax generation: Activities in the factory are exposed to taxes which generate income to the government. The return can be used to build roads, educational institutions and for other domestic economic activities. Globally exposed: Indian domestic companies are accessed to foreign markets and are globally recognised. Technology transfer: Best in practices with economic concepts and technological know-how of the host country as it involves establishing and functioning of a firm. What are the disadvantages of FDI? Like any other investment, FDI also has its own disadvantages. Some of them are discussed below: Profits of small domestic business and supply chains might get affected adversely. Huge MNCs try to monopolise and take over highly profitable companies. Might slightly affect the exchange rates of the currency. Extensive use of precious resources leading to decreased use for domestic purposes. What are Greenfield and Brownfield Investments in FDI? MNCs investing in abroad companies are often referred to as Greenfield investments and when these entities are involved in other acquisitions and merge with foreign firms, they are also known as Brownfield investments. Both of these investments are helpful in driving financial and economic development indirectly. Greenfield investments are said to have a relatively higher impact on a country’s economy as it aids in capital accumulation. Whereas, Brownfield investments positively contribute to the transfer of knowledge and influence technology.   
Kranthi Tilak Reddy
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An Overview of Foreign Direct Investments

Kranthi Tilak Reddy
Blog
22nd Jan, 2018
An Overview of Foreign Direct Investments

We all are aware how indispensable Foreign Direct Investments (FDI) are to boost economic growth on a large scale. Moreover, the foreign capital flowing into any country is also one of the powerful sources for economic development of India as this money is used to establish tangible assets in company.

Meaning of FDI:

Foreign direct investment is a broad term where an investor from a different country invests money in a business of another country to take economic advantage of expansion, wages, cheap skill set etc. This can be done either by setting up a business with an infrastructure for operations or by the way of purchasing business assets in other countries by the Multinational Corporations (MNCs).

FDI example: SAIC Motor Corporation is planning to enter India’s automobile market and begin operations in 2019 by setting up a fully-owned car manufacturing facility in India.

Types of Foreign Direct investments:

  1. Horizontal FDI is where entities carrying on similar activities combine.

  2. Vertical FDI is where companies performing different types and stages of manufacturing combine to produce the final product.

  3. Conglomerate FDI is the most different one where investments are made in unrelated business, it is challenging as it involves working in a new industry and fresh markets.

What are the advantages of FDI?

There are a plethora of advantages that a growing economy like India can derive from FDIs. Few of the predominant benefits of FDI are listed here.

  • Source of capital: They act as a source of external capital to the Indian companies, especially growing startups which in turn is beneficial in deriving more revenue.

  • Employment opportunities: Once the infrastructure is set up, the business requires local labour, equipment etc leading to the creation of new jobs.

  • Tax generation: Activities in the factory are exposed to taxes which generate income to the government. The return can be used to build roads, educational institutions and for other domestic economic activities.

  • Globally exposed: Indian domestic companies are accessed to foreign markets and are globally recognised.

  • Technology transfer: Best in practices with economic concepts and technological know-how of the host country as it involves establishing and functioning of a firm.

What are the disadvantages of FDI?

Like any other investment, FDI also has its own disadvantages. Some of them are discussed below:

  • Profits of small domestic business and supply chains might get affected adversely.

  • Huge MNCs try to monopolise and take over highly profitable companies.

  • Might slightly affect the exchange rates of the currency.

  • Extensive use of precious resources leading to decreased use for domestic purposes.

What are Greenfield and Brownfield Investments in FDI?

MNCs investing in abroad companies are often referred to as Greenfield investments and when these entities are involved in other acquisitions and merge with foreign firms, they are also known as Brownfield investments. Both of these investments are helpful in driving financial and economic development indirectly.

Greenfield investments are said to have a relatively higher impact on a country’s economy as it aids in capital accumulation. Whereas, Brownfield investments positively contribute to the transfer of knowledge and influence technology.   

Kranthi
Blog Author

Kranthi Tilak Reddy is one of the co founders and COO of White Matter Advisory services P Ltd. He is an Engineering graduate from SRM University and has done his Masters in finance.Being a true go-getter and an optimist to the core he has grown up the ranks in banking industry at an astonishing rate, his last stint being Associate Director, Business Clients -South with Standard Chartered Bank. With over 10 years of association with SME businesses and clients he certainly brings rich vein of expertise to the WMA table but more importantly his alluring passion towards great and customer service” the foundation on which he asserts WMA has been built.

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